Aggregate Evidence on Price Rigidities and the Inflation-Output Trade-Off: A Factor Analysis of Factor Shares

Christian Jensen ()

Annals of Economics and Finance, 2017, vol. 18, issue 2, 227-252

Abstract: We find inflation statistically significant in explaining movements in income shares of labor, capital and profits, controlling for other potential sources of these co-movements, such as competition or unionization. These controls are generated through factor analysis, which explains covariances of observed variables in terms of underlying unobservables. Accounting for the observed comovement between inflation and the income shares without nominal rigidities is difficult, since income shares are not likely to impact inflation, or monetary policy, and are independent of most variables and shocks, including those to productivity. Hence, the relationship supports the relevance of nominal rigidities at the aggregate level.

Keywords: Price rigidities; Inflation-output trade-off; Phillips curve; Sticky prices; Monetary neutrality; Factor analysis (search for similar items in EconPapers)
JEL-codes: E25 E31 E40 (search for similar items in EconPapers)
Date: 2017
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